I wondered aloud if perhaps China and the US had struck a “backroom” deal
regarding their roles in the ongoing “currency wars.”
reason for wondering this stemmed from a dramatic change in Treasury Secretary
Tim Geithner’s rhetoric concerning the US Dollar, combined with China’s sudden
decision to raise interest rates.
the US had been branding China a currency manipulator and blaming it for the
former’s financial and economic woes for months. China, in turn, had responded
by lowering the rate of its purchases of Treasuries, charging that the US Fed
was damaging global balances and issuing veiled threats that it might consider
the “nuclear” option of actively dumping US debt.
context, the sudden change in Geithner’s rhetoric, combined with China’s move
to raise interest rates, marks a MASSIVE change in monetary posturing. It is,
in a sense, a 180 on the US’s part combined with an “actions speak louder than
words” move on China’s part.
two developments, I couldn’t help but wonder if the world’s two super powers
(one on the decline, the other on the rise) had struck a “backroom” deal on
currency issues: the US to stop demonizing China while destroying its own
currency and China to make monetary gesture signifying it won’t continue to
“manipulate” its currency lower (yes I know the two currencies are pegged, but
China’s move is a gesture towards
strengthening the Yuan).
this is mere conjecture... for now However, given how lopsided the “inflation
trade” is and given just how much this latest stock market rally has been
fueled by expectations of the US Federal Reserve announcing an enormous ($1
trillion+) QE 2 Program at its November 3 meeting, these developments could
have a MAJOR impact going forward.
change in China/ US rhetoric provides a new, totally non-discounted backdrop to
the market’s expectations of a QE 2 program from the US Federal Reserve.
Everyone assumes the Fed WILL announce a massive program. But in light of these
recent developments, I wonder if it actually CAN.
that over the weekend the G20 meeting saw Germany, India, and China all
blasting US monetary policies for creating bubbles and damaging global trade
balances. We’re already seen hints of trade wars between China and the US with
rare earth elements. And we’ve also seen a currency war break out globally with
Brazil, Colombia, Peru, Russia, South Korea, Serbia, Romania, Switzerland, and
Thailand all actively intervening in the currency markets.
point is key as it indicates foreign powers are more than willing to engage in
outright intervention in order to fight the Fed’s anti-Dollar policy (cheaper
Dollars means appreciation in foreign currencies, which in turn squeeze
exporting margins). In this context we have to seriously ask, CAN the Fed
really announce a MASSIVE QE 2 program?
After all, if the Fed DOES announce such a program, then we are undoubtedly
heading into outright trade wars, tariffs, and even MORE currency intervention.True,
Bernanke has ultimately got his sights set on destroying the US Dollar. But
with global tensions growing, he’s got to walk a fine line between saving Wall
Street and pissing off the US’s biggest creditor (and the only country that
still owns more US debt than the Fed).
the Fed DOESN’T announce ANY QE 2, then we are likely heading into a Crash for
stocks. Remember, the only thing that kept us above 1,000 on the S&P 500 in
July (and that caused stocks to rally from mid-August onward) was hints and
promises of more liquidity and hopes of more QE. If the market is disappointed
by NO QE 2 announcement, then we are wiping out the 12+% rally from September
in short order and likely heading to 1,000 on the S&P 500.
neither of these options is too appealing for the Fed. So it seems to me that
the most likely outcome is more “half measures” similar to the current QE lite
program which involves the Fed buying US debt WITHOUT (supposedly) printing
money to do it.
Thus, I expect that the Fed’s November 3
meeting will unveil something along these lines: a program that involves the
Fed buying more US debt in a way that doesn’t piss off the US’s creditor nations
or the US populace too much.
example would be for the Fed to announce another $100-200 billion or so in debt
purchases (a decent amount but not nearly the HUGE amount the stock market
expects). The Fed could always sugar coat this disappointment with promises of
additional stimulus if needed so as to mitigate the damage to stocks.
point is this: the Fed WANTS to announce a large QE 2 program. But it might NOT
be able to do this without rocking the global monetary boat too much.
Consequently, we may be approaching a fantastic trading opportunity to the
downside after the Fed’s November 3 meeting. The market has already priced in a
massive QE 2 program. So any disappointment could result in a sharp reversal
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